Secret Reserve Bank of Australia documents reveal that people who bought properties between 2004 and 2007 are falling behind on paying their home loans more than other borrowers.

The RBA analysis contrasts with recent commentary that suggested first-home buyers who took advantage of higher government grants during the global financial crisis were the biggest default risks.

Documents published yesterday by the RBA under Freedom of Information laws state that the central bank needs to be “alert to the possibility that many households might become overstretched".

Housing arrears for the banking sector have risen from a cyclical low of 0.20 per cent in 2002 to 0.70 per cent, in line with the last peak in arrears in 1996, JPMorgan says.

Earlier this year bank chief executives including Commonwealth Bank of Australia’s
Ralph Norris
and Westpac Banking Corp’s
Gail Kelly
played down the trend, attributing the rise to natural disasters, post-Christmas seasonal factors and the “seasoning" of loans written in 2008 and 2009. Home loans usually showed the most signs of distress two to three years after being written, banks said.

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Speaking notes prepared in June for the head of the RBA’s financial stability department, Luci Ellis, said the arrears rates on home loans had drifted up as interest rates rose.

“The cohort that borrowed in 2004-2007 is performing a lot worse than those who took out loans before or since then," the RBA said.

“Many of the borrowers in that period were investors, and thus more prone to speculative motives than owner-occupiers."

However, the bank was not alarmed about the trend and said that lending standards during that period eased, but had since tightened again.

There was a surge of first-home buyers in 2008 and 2009 in response to a doubling of the first-home owner grant to $14,000 and tripling to $21,000 for new homes.

“These households usually have less equity in their home, so we continue to watch them closely for emerging signs of stress," the RBA said.

“But so far, they are behaving like earlier cohorts of first-home buyers."

Earlier this year, Mrs Kelly said the first-home owner segment continued to perform better than the average of the bank’s portfolio.

“The first-home owner is often in an improving ­scenario in their career, because they’re a young accountant, doctor, lawyer, banker, and they’re in a rising income pattern," she said.

Bank shares have been sold off this year, partly because of concerns about the sustainability of high house prices. The household debt to income ratio was 154 per cent in the June quarter, well above the 99 per cent reading 10 years ago.

Some international investors, including the high-profile fund manager Jeremy Grantham, have labelled the property market a “bubble" waiting to explode.

The RBA said the recent housing market meltdown in the United States had led observers to put more emphasis on the risks posed by households and housing markets.

Still, it said it was very rare that households were the instigators of financial instability and there were key differences between Australia and the US, which had a large subprime sector and weak regulation. “We should bear in mind the true relative risk posed by different parts of the non-financial economy," the RBA said.

“We would be doing our fellow citizens a disservice if we allowed the housing market to become the Maginot Line of financial stability analysis."

The central bank documents said a challenge for the banking industry in coming years would be adjusting to a slower pace of credit growth compared with the previous few decades, “which will limit their [banks’] growth opportunities".

However, the RBA said there was little evidence that banks were actively loosening lending standards or taking on other risks in an attempt to sustain the earlier rates of growth.